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Sunday, January 11, 2009

The CEO of Satyam Computer Services Limited has acknowledged that the accounting books for the entire company was a complete sham for several years. The tide has gone out and caught Satyam with its pants down. Actually, Satyam hasn’t been wearing any pants for many years.

Pre-market, the shares are down over 90% with bankruptcy certainly to follow.

Mr Raju admitted that the September quarter accounts for last year included a non-existent cash and bank balances of Rs50.40bn ($1bn), non-existent accrued interest of Rs3.76bn and other irregularities.

In the September quarter alone, the operating margin was shown as 24 per cent of revenue compared with an actual operating margin of 3 per cent, due to inflated revenue and profit figures.

The full 4 and a half page letter he wrote is quite interesting to read. The full letter in pdf form is here.

Since I have been looking into accounting to better understand a company, I thought it would be interesting to see whether I could detect the fraud in the statements. Disappointingly, I couldn’t see much wrong with the numbers. Maybe it’s because I still have a lot to learn, but the numbers look real, the percentage differences between each item and the relation to each other over the years are very consistent. Maybe the clue was that it was TOO consistent.

What’s even more boggling is that the statements of cash flows seem to be clean as well. This obviously means that not only was the income inflated, but the cash numbers were massaged by a master masseur.

No wonder people are calling this India’s Enron. The auditing company surely must have been part of this or the CEO is truly a smart guy.

A final interesting point I want to bring up is that the CEO tried to cover up the fraud by chasing acquisitions in order to delay the payments of the acquired company. This now adds to why I dislike companies that seek to grow through acquisitions. So many things can be hidden and a good company can suddenly go from transparent to hazy (just like Bank of America).

Satyam is certainly a company worth investigating further as a case study and one that will surely be a topic of many business classes in the future.